The Federal Enabler

What happens when consumers can’t afford to borrow and banks can’t afford to lend?

The Federal government redoubles up its efforts to urge the two unwilling parties to act rationally, play nice and get back to borrowing and spending.

No sense in accepting limitations or even having a consideration for the future… if you need something or some service now but are broke of current dollars well there is always future wealth that can be tapped so long as Uncle Sam is at the helm.

Fannie Mae, Freddie Mac, FHA, SBA, Sallie Mae, Ginnie Mae… it makes no difference which Mae, A or Mac, the government can sponsor you some debt for things like college tuition, starting a business, buying a home and who knows what else.

What kind of half rate democratic debtor nation would we be if we didn’t mandate equal access to debt servitude?!

On that note… take a look at the latest ratio of federal government owned consumer credit to total consumer credit outstanding.

It’s currently just over 9%... that’s up over 75% just the last 12 months…. so 9% of all consumer credit has been brought about by the good graces of our representatives in Washington… aren’t we all just so lucky?

The Great Unwind

Inflation or deflation… stag-flation, stag-deflation … hyper-inflation… possibly even hyper-deflation… or maybe just a bout of frisky-flation?

Never has it been so hard for the consensus to agree on the coming trend in prices but given the circumstances, it should come as no surprise.

While the “invisible hand” has been working overtime to right the ship, deflating the system of fictional value made possible only through the dynamics of a multi-decades long credit fueled speculative mania, our federal government will stop at nothing to attempt to prevent such an adjustment and its disastrous political consequences.

As it stands, the consensus expects that the feds will win this struggle with many citing the “power” of the printing press, our now more advanced knowledge of Keynesian chicanery as well as the caliber and quality of the stewardship within the Administration, the Treasury and the Federal Reserve.

Yet, in this classic “man versus nature” match-up, man must come out the definitive loser lest he stands unchallenged to invent his own future not of hard earned progress but through fraudulent planning, gimmicks and manipulation.

But will he ultimately lose to inflation, deflation or both?

Although in the long term there could be a mixture of both, deflation appears to be the larger overarching force.

First, with the mania now long gone, consider that homes were easily the single largest asset that most Americans have ever had an opportunity to speculate in.

Likely many millions of American will never again in their lifetime EVER be allowed access to the level of debt that they had at their disposal in 2005-2006.

This means that they are likely permanently sidelined in terms of consumption... they will never again be able to over-consume to the degree seen in 2005.

At the same time, it’s more than likely also true that a massive natural deflationary force will be coming from aging Boomers reverting to a more net-seller and net-liquidator posture as they struggle through their “retirement” years and especially in light of falling home prices.

This appears to be a classic trap of sorts… the unwinding of major assets, contraction of credit, aging population and a perpetual decline in consumption.

Add in declining wages and structurally high unemployment and the outcome becomes clear.

What is less clear is how hard the feds will try to prevent the inevitable.

Invention of Wealth… Eureka!

Nominal personal income is flat… personal interest income… slump … personal dividend income …. slump … personal income from receipts on assets…. Slump.

Personal income from transfer payments…. WILD BULL RUN!

How novel! … This way Americans can take the ups with the ups and the downs!

No sense is feeling the pinch of that downturn (even if the pinch is coming on the heels of a multi-decade speculative frenzy and consumption boom)… with the federal government around prosperity is not just a goal … its mandatory!

With $8000 homebuyer tax credits, unemployment benefit extensions, foreclosure mitigation efforts, government controlled mortgage lending rates, corporate bailouts and emergency facilities for just about every non-functioning credit market the Federal Reserve can prop-up it seems that everyone from Wall Street titans to the (…formerly) affluent and capable “upwardly mobile” Americans to the common man are sidling up for a suck from the teat.

But, before you get all up in arms over the “transfer” portion of “transfer payments” one should first consider the extent of the money creation that has taken place in the last six months…

Yes… This is no mere “redistribution of wealth”… this is “invention of wealth”…

In this way the U.S. government (in an uncharacteristic stroke of efficiency) has cut out the middle man… no sense in promoting some fraudulent industry (like finance, mortgage, and real estate) just to tax and spread… simply print up all the dough and dole it out like monopoly money.

Is inflation on the horizon?

The government clearly has that as its foremost goal and the seeds are clearly in place but in any event, we are all a lot worse off for the multi-decade speculative manias and the government’s equally distorted and delusional response.

By the way… for those of you wondering… the image above of the sign proudly announcing a project funded by the “American Recovery and Reinvestment Act” was taken within the borders of Lincoln Massachusetts… one of America's most affluent communities...